VAT and non-refundable deposits

VAT and non-refundable deposits

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I have a client who runs a small hotel and is getting himself and me confused over two VAT issues.  The scenarios are as follows:-

  1. A customer books a function and pays a deposit of £1000 (non-refundable).  The function is cancelled - is the deposit now vatable or non-vatable revenue?
  2. At a wedding, £1K is put behind the bar as a deposit but the wedding party only consume £500.  Is the balance a vat or non-vatable service?

Thanks

Replies (10)

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By Steve Kesby
26th Mar 2014 16:50

In scenario 2...

... doesn't the father of the bride want the other £500 back.

In the non-refundable deposit situation, you're getting caught by the fact that the law says that anything done for a consideration is a supply of services. You haven't actually supplied anything of any worth to the customer, but you took their booking and they paid you a non-refundable amount to do so.

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By neileg
26th Mar 2014 16:58

In scenario 1...

VAT needs to be accounted for on the payment of the deposit so the subsequent cancellation requires no action as far as VAT is concerned.

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By User deleted
26th Mar 2014 17:06

I disagree, Neil

If the intended supply is cancelled, there is no supply and therefore no VATable consideration - the VAT should be reclaimed.

The position is different if the deposit is used to reserve a room or other facilities - if the room etc is kept aside then the hotel will have made a supply so the deposit remains VATable.

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By Wanderer
26th Mar 2014 17:25

Forfeit deposits

If you ask your customer for a deposit against goods or services but they then don't buy them or use the services, you may decide to keep the deposit - usually you've told your customer about this in advance and it's part of the conditions for the sale. This is called a 'forfeit' deposit. For example, hotels often ask for a deposit against a room, and may keep part or all of the deposit if the customer doesn't turn up.

You should declare VAT on the deposit when you receive the payment or when you issue the VAT invoice, whichever happens first.

If you keep the deposit because your customer changes their mind about the goods or service and doesn't want them any more, there is no VAT due. If you have already declared it on your VAT return then you need to show it on the next one as an adjustment.

http://www.hmrc.gov.uk/vat/managing/special-situations/instalments.htm

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By Steve Kesby
26th Mar 2014 17:45

Agreed

I'd had a recollection of a decision a while back that the forfeited deposit was VATable. I couldn't recall the reasoning, but it had to involve the deposit being considered to be consideration for a supply. It seems that it was my recollection that was faulty.

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By User deleted
26th Mar 2014 18:05

For the avoidance of doubt

If the deposit is merely an advance payment that is forfeited on a no-show, then no VAT is due. But if the deposit is required in order to keep a room free then that is deemed to be a supply regardless of whether the customer shows up.

Bass plc

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By blackcat
26th Mar 2014 19:13

Thanks for all your comments.  I would also have thought that the £500 overpayment on the bar would be returned but it is a condition of the wedding that £1000 is spent at the bar.  My client is of the opinion that both circumstances are non-vatable as no service was received.  If Basil does have reference to the tribunal that would be great and will put it with my notes. :-)

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By Steve Kesby
26th Mar 2014 19:22

Well...

... with the bar, if it's essentially a minimum spend of £1,000 and people only drank drinks to the value of £500, I'd suggest that the VATable consideration for those drinks is £1,000.

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By DMGbus
26th Mar 2014 23:43

709/3 HMRC interpretation / guidance

Notice 709/3 Hotels and holiday accommodation

June 2013

7.2 Cancellation charges

Normally, if you make a cancellation charge to a guest who cancels a booking, VAT

is not due, because it is compensation. This includes amounts debited from credit

cards using details provided at the time of the booking. Where the cancellation

charge takes the form of a retained deposit, you can reclaim any VAT already

accounted for as an adjustment to your next return.

But this does not apply to guaranteed rooms which you are obliged to hold for a

customer for an agreed period. Any fee charged where the room remains available to

the customer is consideration for a supply and is subject to VAT.

Where you arrange or provide any guarantee or insurance against your guest having

to pay cancellation charges, the charge you make for this may be exempt, if you hold

a “block insurance policy“. You should consult Notice 701/36, Insurance, paragraph

2.5, Insurance transactions effected by holders of block policies.

Any commission you receive from a person permitted to carry on an insurance

business under Section 2 of the Insurance Companies Act 1982 is exempt.

7.3 Booking fees

Booking fees are treated in the same way as a deposit, (see paragraph 7.1).

If you are an agent who arranges a supply on behalf of someone else you must

account for VAT on any booking fees you charge whether or not the booking is taken

up.

7.4 Retention fees

Retention fees are paid to reserve accommodation for future use and are standardrated.

However, a retention fee paid for a period of absence after the first 28 days of

a stay may benefit from the reduced value rule (see paragraph 3.3).

If the fee is no more than the amount of your charge that you treat as being for

accommodation under the reduced value rule, no VAT is due on the fee. If the fee is

more than that amount you must apportion the fee between accommodation and

facilities (see paragraph 3.2).

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By neileg
27th Mar 2014 09:18

Mmm...

OK, I got it wrong!

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